U of I ECON 471 - CEO Salary and Return on Equity (11 pages)

The Two Variable Model CEO Salary and Return on Equity Applied Econometrics Walter Sosa Escudero Source Wooldridge 2009 Motivation and Data Goal study how CEO salaries are tied to performance Data 209 CEO s for 1990 Source Business Week 5 6 91 Salary annual salary in thousands of dollars ROE return on equity net income total equity a measure of performance A quick look at the data Basic statistics 15000 10000 0 5000 salary 0 20 40 roe A rather weak relationship 60 0 20 40 roe 60 0 1000 salary 2000 3000 4000 Model Our model will be Salary a b roe u We will estimate parameters using the least squares method Regression output 15000 10000 5000 0 0 20 roe Fitted values salary 963 191 18 501 roe 40 salary 60 Interpretations Overall the fit is poor R2 0 0132 Means only 1 32 of the variability in salaries is explained by performance If roe increases in one point then salary is expected to change in about 18 5 thousands Prediction if roe 30 then the predicted salary is 963 191 18 501 30 1 518 221 The t statistic for roe is 1 66 This statistic test the null that roe is notsignificant What can you conclude from this